Archive for the ‘Financial Advice’ Category

The Ontario government has gone ahead and established an Ontario Retirement Pension Plan (ORPP); this plan is for employees with no pension plans or for those who have pension plans that the provincial government considers inadequate.

The new ORPP is a mandatory pension that forces workers to contribute 1.9% of their annual pay (to a maximum of $1,643/year) which employers will have to match.

The plan will be phased in over 2 years. Larger companies will be required to join by January 1, 2017; smaller operations like convenience stores will be required to contribute a year later.

The Canadian Federation of Independent Businesses and the Ontario Chamber of Commerce have warned the provincial government that forcing workers and employees to contribute to a provincial plan will only drive up the cost of running a business and result in fewer jobs.

Only 26% of Ontario businesses believe they can shoulder the financial burden that will result from the ORPP. An additional 44% of employers say they will immediately reduce their current payroll or hire fewer employees when the Ontario Register Pension Plan comes into effect.

Contributions to the plan will be “locked in,” prohibiting people from accessing these funds before retirement. One important note is that the age at which these funds can be accessed has not yet been set in stone (will it start at age 65? 67? Or age 72?). This will not be determined until after the plan is in place.

Unfortunately, employers that have implemented a Defined Contribution Pension Plan (DC plan) for their employees will also be required to enroll in the ORPP scheme. The provincial government has deemed DC pension plans and group RRSPs as inadequate.

A poll conducted by the Canadian Life and Health Industry found that just under 80% of the companies with a DC plan or a group RRSP will likely reduce their contributions or consider eliminating their plans completely.

So who really wins?

The exceptions to the new ORPP are those individuals who already participate in defined benefit pension plan. A Defined Benefit Pension Plan (DBPP) is set up so that the income you receive upon retirement is predetermined and is usually based on a formula involving your years of service and earnings. You receive annual statements clearly indicating the benefit on your retirement date. In these types of programs, your company manages the assets – you have no active involvement. The Ontario government has exempted these such plans from the ORPP.

The other registered pension plan is the Defined Contribution Pension Plan (DCPP), which is set up so that the income you receive upon retirement is not predetermined. It is based on the assets within your individual retirement plan account at the time you actually retire. In DCPPs, your company makes a contribution based on a formula, which may or may not require you to make some type of matching contribution. These contributions are usually based on a fixed percentage of your salary or on a specific dollar amount and are deposited into an account in your name. DCPPs are popular because they offer you choice and flexibility. DCPPS – and Group RSPs – have been deemed by the Ontario government as not being exempt from the newly mandated ORPP. Food for thought: Consider the implications of ORPP on a company or business owner who currently has this plan is place: Can they reasonably shoulder this added business cost? What benefits will be cut to accommodate this newly mandated pension plan?

Usually pension plans have a $3,500.00 minimum earnings threshold. The Ontario Budget noted that no minimum has been set and further analysis is required on this issue.

Lastly, the ORPP fails to provide for the self-employed, which is troublesome as more manufacturing plants leave Ontario (e.g. General Motors just announced it is going ahead with plans to close operations in Oshawa, and will eliminate 2,000 jobs).

Having a Certified Financial Planner to guide you through the complicated realms of finance and investments is critical to your financial future. But do you know how your advisor is compensated? The two most popular methods of compensation are commission or fee based.

Commission Advisors
With commission there are two different types; front-end-load where the purchaser pays between 1-5% at the time of purchase and back-end-load where you pay a fee when you sell the fund. The percentage of this fee declines each year that you hold the fund usually after 7 years it reaches zero. The advisor will also receive on-going commissions to service the client.

Fee Only Advisors
When an advisor uses a fee-only structure, direct payment from clients is the only source of compensation. Charging a fee-based on an annual percentage of your assets that the advisor manages for you is one type of fee-only compensation. Generally the more services offered the higher the fee. If your advisor provides financial planning with managing your assets the fee will be higher. With these advisors you are paying for their advice and experience, many of these advisors have a minimum account size of between $100,000- $500,000.

Fee For Service Advisors
These advisors charge an hourly fee or a flat fee for the services that you engage them for. This form of compensation is similar to how you pay a lawyer or an accountant. this may be a good option if you are paying for advice only and the client is willing to implement the recommendations on their own.

Many advisors offer a combination of these compensation methods, based on the client’s needs, the complexity of the planning and the size of the account.

Some argue that fee advisors provide greater objectivity as their compensation precludes incentives for selling products. However, investors with smaller portfolios may not be able to afford a fee only advisor and as a result will compensate their advisor with commissions.

There has been a lot of debate in the media about which style of remuneration is better for clients. The overwhelming majority of financial advisers in Canada are still commission-based but our opinion is that fee based or fee–for–service financial planning is much better for clients as it lessens the risk of a conflict of interest.

Most clients require advice in areas such as budgeting, savings, insurance, and tax planning. Commission based advisors fail to provide these services due to the fact that they are not compensated unless they are placing the client into a product they sell.

In our opinion most people need financial planning advice on budgeting and saving and utilizing a fee based independent Certified Financial Planner is the best means to attain solid financial advice.

Fall has started, and for many, it is time to put your nose to the grindstone at work. The next few months are the perfect time to reset your wallet and focus on your long-term financial goals, ahead of the Christmas shopping season, when restraint and moderation tend to disappear.

Save Early and Save Often.

Set up a monthly, automatic transfer from your chequing account into your investments. This makes saving automatic and turns it into a habit. Start off by saving 10% of your gross income, then gradually increase it to 20%.

Keep Track of Spending.

This sounds great, but if you are living paycheque to paycheque, putting aside savings every month may seem like a stretch. Don’t be discouraged. Take a look at where your dollars are going, and chances are, you will be able to save some money. The most important thing you can do is to start tracking your spending and income. I know many people who make plenty of money and pay the bills and everything is fine, but they really don’t know how much they are spending on items like dining out, groceries, utilities, coffee and hobbies.

Use Technology.

Tracking your spending requires commitment on your part. Using apps on your smart phone can certainly make it easier. If you don’t have a smart phone, use your credit card and bank statements to track your expenditures for a few months. Or, you can always use the tried-and-true method of keeping receipts, budgeting, and posting your data to an Excel spreadsheet.

Make Budgeting a Habit.

If you don’t take the initiative to do it, it won’t happen. Recurring expenses, no matter what they are, add up. Gym memberships, magazine subscriptions, getting your hair and nails done twice a month – all these little things add up in the long run. All I’m suggesting is that you start to keep track of these small purchases. The process can be a real eye-opener and it will show you where your non-existent savings are going.

Make Small Changes.

Look for little ways to dial back your spending. The key is to focus on small things that you can do, so that you don’t feel like you can’t spend at all. Sometimes changing how you do things can save you a lot of money. If you enjoy going out for a meal with friends, but find the cost is preventing you from saving money, host a potluck at your house. Supply the main dish, and ask everyone to bring a beverage or side of their choice. When it comes to saving, getting creative can really pay off.